Expatriate Tax Tips

• It is your responsibility to file a US expat tax return every year, claiming your worldwide income and assets.
• Your self-employment earnings or foreign wages may qualify for the Foreign Earned Income Exclusion (FEIE) of up to $92,900 if you are eligible. If you are married your spouse's wages may also be excluded. Whether you are compensated from a stateside employee for working abroad or you're paid by a foreign employer you may be able to claim the exclusion if you meet all the qualifications outlined in the FEIE rules and regulations.
• If you claim the FEIE you will be able to deduct a portion of your housing expenses. The amount you will be able to claim will vary greatly by country. Hong Kong, for example, has one of the highest exclusion amounts. Remember that housing expenses include house cleaning, maintenance, utilities, rent, repairs, and taxes.
• If you have to pay foreign taxes on your personal earnings to your resident country you will be able to take a credit to offset the taxes you owe on personal income which is claimed on Form 1040 - this is known as Foreign Tax Credit.
• If you have foreign financial accounts from which your income exceeds $50,000 you are required to file Form 8938 to avoid hefty penalties assessed by the IRS.
• If your business is operated through a foreign corporation, limited liability corporation or partnership you will be required to file particular forms like Form 5471 and Form 8865.
• There are some countries that have a Social Security agreement with the US which helps to lessen the taxes you owe as an independent contractor under the laws of your foreign resident country. If you aren't residing in one of these territories, you will have to pay the US SE (Self Employment) Tax on all your net profit earned in your resident country as an independent contractor.
• If you own foreign financial or bank accounts or pension plans whose totals – in aggregate – exceed $10,000 you are required to file the FBAR no later than June 30th of the year following the taxable year in which you held these accounts. Even if they do not total $10,000 at the end of the year but they exceeded this threshold any time throughout the year you must still file FBAR on time or subject yourself to risk of huge penalties.
• If you own a Passive Foreign Investment Company (a foreign mutual fund or a sizeable investment in a foreign LLC, corporation, or partnership) you must report all income using specialized forms. Failure to report this income will put you at risk of severe consequences when you finally liquidate your assets.
• Unless otherwise stated by a US tax treaty, contributions made to foreign pension plans (like a 401k) qualify as taxable income on your US tax return. You are required to report these earnings to the IRS; additionally, you must list the pension plans annually using Forms 3520 and 3520A.
• If your taxable earnings exceed the FEIE amount you may open a US 401k or IRA whose value is not to exceed to the level of earnings over the FEIE amount.
• In many countries you are able to make an election with regard to specific legal business entities to have such entities treated as a flow through on your US taxes. What this means is that the net income or net loss of said foreign entity will ‘flow through' to your US tax return. This rule allows us expats to benefit from foreign losses and keep from paying taxes two times on foreign income. This election will also allow you to claim all foreign taxes paid by the entity as tax credits on your US expat return to help offset US taxation.
• There are many allowances for housing, education, transportation, and other expenses which are not taxable to you in a wide variety of foreign countries but which are taxable by the United States.
• There is no limit to the money you can make overseas or the value of real estate you're able to acquire as long as all transactions are reported accurately to the IRS on your United States expat tax return.
• If you are still an official US Citizen or permanent resident your assets overseas may be subject to US gift and estate taxes.
• If you live in another country besides the US and your spouse is a nonresident, you are not required to include their income, assets, etc. on your US expat tax return.

Although it is not historically common for US expatriate taxes to be audited by the IRS it may become more likely in the future. The IRS is increasing the number of audits it is performing every year and is going to new measures to ensure that all worldwide income is reported accurately. Here are some tips to help you avoid an audit when you file your US expatriate taxes.

• If your tax return contains unusual expenses or income items add a footnote to explain such an item. A valid explanation will help ward off an audit.
• If you are required to file special forms like FBAR and Form 5471 be sure to fill them out correctly and entirely. Failure to report these forms accurately will cause the IRS to want to investigate further.
• Only file items on your return which are required by the IRS. Do not include supporting documentation like foreign earnings statements or bills. These items may raise additional questions with the IRS and inspire an audit.
• Do not fill out any more of Form 2555 than is required for the FEIE type you are claiming.
• Try to get a maximum filing extension to October 15th. Although not admitted by the IRS, many tax professionals are under the impression that returns which are not filed until the last minute are not as frequently audited as those which are filed and processed within a normal time frame.
• Don't think the IRS won't find out about your foreign affairs. Be sure to report all foreign bank and financial accounts, foreign income, foreign property, etc so your forms and FBAR report accurate totals.
• File a tax return every year – even if your income is below the required threshold. This will not only help you keep up with the three year statute of limitations which prevents the IRS from auditing too far back, but it can also avoid the IRS from questioning you later about unfiled returns.
• If you are filing foreign tax credit Form 1116, know that it is a highly complicated form. If you are unsure how to fill it out correctly you may be wise to seek professional assistance to avoid issues which could result in an audit, or – even worse – penalties.
• If you are selected for an audit, you may also wish to seek professional help. It's important to remember that an IRS auditor is there to perform a job and he/she is not your friend. During the course of answering questions you are liable to make a statement to your auditor which can either hurt you or cause the investigator to look even further than originally intended. A professional will help avoid mistakes like these.